To Taper Or Not To Taper? That Is The Question, Again

By Michael Aneiro

Carissa Dixon

Whether ’tis nobler in the mind to taper

Just when you thought it was a done deal that the Fed would start tapering its monthly bond purchases at its upcoming policy committee meeting, in comes a disappointing August jobs report. And suddenly everything’s back in question again.

“This report certainly throws a monkey wrench into the market’s thinking as to what the Fed may do,” writes Adrian Miller, fixed-income strategist at GMP Securities. “More important, how will the Fed interpret these numbers? There is no denying the fact that even with a solid job report, the true health of the labor market is quite suspect with recent job gains being in lower paying positions at less hours while the duration of unemployed remains too high. And now with a weak August report many of the FOMC participants who have been sitting on the fence will sound out a chorus of ‘no taper’. And yet, with QE providing little economic support and only serving to further distort asset prices, the cost-benefit equation still calls for a taper regardless of lackluster growth and clearly unimpressive job gains.”

Miller bets the Fed still pulls the trigger on “a small taper” on September 18th. “Initially we expected a $15 billion cut in purchases, but perhaps this job report has dropped that to a mini-taper of $10 billion.”

Similarly, Tom DiGaloma, head of fixed income rates sales at ED & F Man Capital Markets, thinks the report was bad but not bad enough to derail the Fed’s tapering plans. “This was a horrible set of jobs figures,” DiGaloma writes, citing the large downward revision to July’s jobs number and a drop in the labor participation rate to the lowest level since 1978. “Despite this weak report the Fed will most likely taper in September.”

Using the ten-year Treasury yield as an indicator, the bond market already seems to be moving back toward its previous tapering expectations. The yield had crested at 3.005% overnight, per Tradeweb data, topping the 3% mark for the first time since July 2011. It had slipped to 2.955% right before the release of the jobs report and then immediately fell further upon the report’s release to 2.869%, as markets questioned whether the data will be strong enough to induce the Fed to start tapering. Now it’s creeping back up again, checking in most recently at 2.921%.